Understand the difference and find out which is the right option for you.
Opting to work through an umbrella company is an increasingly popular payroll option in the UK for temporary workers and contractors. However, the understanding of what this actually means for workers is still largely misunderstood. This article aims to highlight in simple terms the differences between umbrella companies and agency PAYE systems; their functions and how worker payroll is processed. This article also affirms why it’s a ‘no brainer’ to work through an umbrella company if you are a temporary worker placed on multiple assignments.
What does it mean to work through an umbrella company?
An umbrella company employs temporary workers (agency worker, contractor or teacher) who work on temporary contracts or assignments, usually through a recruitment agency. Whilst the recruitment agency will place its candidates in various employment roles, these workers will be paid through the umbrella company on behalf of the agency. Alternatively, workers are paid through recruitment agencies / client on a PAYE system.
What does it mean to work through an agency’s PAYE system?
The recruitment agency will not only place workers in various employment roles but will also be responsible for processing workers payroll via a PAYE (Pay as You Earn) system. The agency is also responsible for ensuring correct HMRC deductions are calculated and that workers receive their P45 and P60. If you as a worker are employed by various recruitment agencies on multiple assignments, this could make your tax situation complicated.
Does it cost the worker more to go through an umbrella company versus working only through a recruitment agency on a PAYE system?
It may appear at first glance that because workers are subject to more deductions through an umbrella company, that they take away less in their net pay. This is not the case, these deductions are uplifted in the agency’s rate of pay.
A workers relationship with an umbrella company should be governed by an over-arching contract of employment. Worker salaries are subject to pay both employers and employees National Insurance (NI), employer’s pension, apprenticeship levy and the umbrella company’s margin rates.
The agency ‘uplift’ workers rate of pay to compensate for these deductions so in real terms they are covering these costs for workers. This also applies to the margin that is charged each week by the umbrella provider.
Still uncertain, let’s take a look at this generic practical pay scenario example.
What are the benefits of working through an umbrella company?
1) Consistent work history for credit applications.
If you are a worker that is employed on various assignments throughout the year, by remaining employed by one umbrella company throughout your various assignments could help you when providing employment history for a mortgage application, loan or financial support due to the continuity of employment opposed to many short term contracts that could affect your application.
2) Tax is much simpler and cheaper
Workers opting to go through the employment agency as PAYE, workers are agreeing to work a full 5-day week and a total of 39 weeks a year through that one agency. This is of course not the reality for temporary workers and contractors. Should a workers assignment not fulfil a full week or term and workers need to look elsewhere, receiving PAYE from multiple agencies has an adverse effect on workers’ tax. Workers will ultimately pay a basic rate tax for each new employer as opposed to receiving their tax code allowance. This snowball effect results in 20% being deducted each time from multiple agencies. In turn, this has serious repercussions on the workers NET pay.
The advantage of using an umbrella payroll provider are the overarching agreements that allow workers tax codes to be spread across all the agencies, resulting in a better return on workers’ pay from the Gross amount. Ultimately workers who operate through an umbrella company benefit from one primary tax code.
Are all umbrella companies the same?
No, that is why it is important to carry out due diligence. There are many businesses that have fallen victim to mini umbrella company (MUC) fraud. This is when an umbrella company reduces tax payments to HMRC including PAYE, National Insurance and VAT. Workers then have to compensate for pro-rata repayments. To avoid this, choose a provider from an accredited governing body that regulate the industry’s standards. Both Professional Passport and FCSA offer a comprehensive list of reputable and accredited umbrella companies to choose from.
Can workers ask their employment agency to process their payroll through an umbrella company?
Yes, as a contractor or temporary worker you can inform your agency that you are employed by an umbrella company. If you inform your appointed umbrella company of your new assignment or agency, they will contact the agency and make all the arrangements on your behalf.
If you are a temporary worker, contractor or teacher and you are considering working through an umbrella company, let one of our friendly expert consultants make a pay calculation for you based on your wage. ePayMe is the preferred umbrella company trusted by hundreds of contractors, freelancers, recruitment agencies and businesses across the UK. You can also find us on the preferred list of accredited providers on Professional Passport Umbrella website.
Give us a call on 01252863700 or drop us an email on info@epayme.co.uk.